Avoiding Madoff

Have you ever watched American Greed or read about some unscrupulous financial services industry professional who has stolen money from clients? We all have, and it’s terrifying to think some chump could steal money from us. Avoiding fraud is just as important, if not more so, than avoiding poor portfolio managers. By not being vigilant about asset safety, you risk allowing some crook to fraudulently abscond with your financial future. And oftentimes, an individual with a fine reputation and whom you least expect to commit an act of fraud is precisely who, by earning your and his community’s trust and respect via philanthropy and more, steals part or all of your money. By way of example, a despicable, evil scumbag named Bernard L. Madoff, or Bernie Madoff, committed the largest fraud ever perpetrated in history. Madoff stole roughly $20 billion―that’s billion―from his clients, and he had almost 5,000 of them. During the global financial crisis of 2008, also known as the Great Recession, we learned that Bernie Madoff, former chairman of the NASDAQ and founder of the then prestigious Wall Street firm Bernard L. Madoff Investment Securities, LLC was, and had been for decades, running an elaborate Ponzi scheme. His firm was regulated and examined by the Securities and Exchange Commission (SEC), yet he still managed to cook the books and steal money from his clients, right under the SEC’s nose. Bernie was active in the National Association of Securities Dealers (NASD), a self-regulatory securities industry organization, serving as the chairman of the Board of Directors and on the Board of Governors. See any irony there? So how can you, an average investor, avoid falling prey to the next Bernie Madoff? How can you protect yourself and your family’s hard-earned life savings from a thief like Madoff? It’s very easy; you simply do not—that’s never—custody your account or any assets with your adviser or wealth manager!

Number one among my Seven Principles of Successful Investing is to Diversify and Custody Away. Simply put, diversify broadly and never custody or safekeep your assets with your wealth manager unless he or she works for a qualified custodian. Then, and only then, is it kosher to custody with that company. I strongly advocate that separate and discrete manager/custodial functions inject prudent checks and balances, thereby dramatically improving asset safety. Just ask Bernard Madoff’s former clients if they wish they had custodied their assets elsewhere. Bernie Madoff would never have been able to commit fraud on the scale he did if his clients had custodied their assets elsewhere. But they didn’t. Madoff both managed and held his clients’ assets in custody, so he cooked the books, sent out false reports to clients (an independent, qualified custodian is required to send its own sets of reports directly to their custodial clients), and they lost billions while Madoff spent their money on a lavish lifestyle. Well, more accurately, a lavish lifestyle on steroids.

Pacific Northwest Asset Management, LLC is an independent, fee-only registered investment advisory firm. We serve our clients as full-time, not part-time, fiduciaries.

Our qualified custodian is Charles Schwab & Co., Inc., one of the largest qualified custodians in the world, and they’re a publicly traded financial services holding company headquartered in San Francisco, California. All of our clients’ accounts assets are custodied at Schwab. Schwab custodies hundreds of billions in assets for clients and advisers’ clients. Furthermore, Schwab provides you with separate, independent reporting of all balances and securities transactions.

So if you want to dramatically reduce your chances of getting screwed by a crook like Madoff, make sure your investment adviser does NOT also serve as your custodian. Ask where the adviser custodies client assets, and if the answer is that they serve as the custodian, turn and run as quickly as you can {unless he or she works for a qualified custodian like Schwab, Pershing, First Clearing, TD Ameritrade, BNY Mellon, State Street, etc.}! Stuart McGehee, founder and principal of Pacific Northwest Asset Management, LLC.

DISCLOSURE: Pacific Northwest Asset Management, LLC (hereinafter “PNW Asset Management”) is an investment adviser registered with Washington State. PNW Asset Management may not transact business in states where it is not appropriately registered, excluded or exempt from registration. Individualized responses to persons that involve either the effecting of transactions in securities, or the rendering of personalized investment advice for compensation, will not be made without registration or exemption.